After decades of little change, a wave of innovation is sweeping over the payments industry, creating fresh opportunities for businesses to drive cost, complexity and risk out of payments. Yet despite these opportunities, few businesses are paying close attention to the way they pay their sellers. For example, cheque usage persists as one of the most common forms of B2B payment.
“Rethinking payments just isn’t top of mind for most companies,” says Gary Conroy, Chief Product Officer at TransferMate. “And from my experience, when they make changes, it’s typically not transformational. Usually, they’ll just shift from cutting cheques to making ACH payments.”
“While the switch to ePayables is a clear improvement, it doesn’t realize the full potential fintech is bringing to payments,” says Conroy. “In fact, I’d argue that ACH payments are only marginally more efficient, accurate and cost effective than cheques all considered.”
The hidden cost of ACH payments
In 2017, ACH payments overtook cheques as the most used B2B payments for the first time in the United States. In theory, the switch should have saved businesses millions of dollars in costs. In reality, the financial benefit has been less clear. For one, cross-border ACH payments are subject to a $50 transaction fee. There are also lifting fees as payments make their way through the correspondent banking network. The payer must cover to ensure their seller receives the full amount.
“The quirks of the correspondent banking system make cross-border ACH payments more complex for both buyer and seller than they need to be,” says Conroy. “Sellers, for instance, often don’t receive the total invoice amount because of the lifting. This creates cash flow, and reconciliation issues for the seller. While it’ll also mean the buyer must initiate another cross-border payment to settle the invoice.”
Although these issues aren’t prohibitive—it’s still much more efficient for buyer and seller than using cheques—they’re not the only downsides with ACH payments. The actual cost of ACH payments hides in plain sight.
“It costs around $20,000 for a business to run a single bank account,” he says. “This is after you consider banking fees, auditing fees, control fees and so forth. But because these costs don’t come in one neat package, they’re often overlooked,” explains Conroy.
That wouldn’t be a problem if companies could use just one account to make all their payments, but that isn’t the case. According to research from The Strategic Treasurer, 37 percent of corporations now operate across at least 11 countries, 34 percent use six or more banks, and 39 percent generate payments in six or more currencies.
It costs a business around $20,000 to manage and maintain a single bank account.
“The number of accounts increases exponentially the bigger the footprint of the company,” says Conroy. “I’ve worked with companies that have thousands of accounts just to make payments and it’s costing them tens of millions of dollars a year just to keep these open.”
Another pain point not solved by the shift from cheque to ACH is the disconnection between payment execution and the rest of the P2P processes. “Payments are a siloed process in most companies, and the switch from cheques to ACH payments hasn’t changed that,” says Conroy.
Typical workflows in most companies still require the payments team to pull data from the ERP, upload these into the banking platform and initiate the payment. Once the payment is complete they’ll download a response file and plug that back into the ERP.
“It’s a complex workflow, and prone to error ,” says Conroy. “And when errors occur it’s difficult to figure out where they happened and fix them. This often leads to delays in payment or incorrect payments getting made. It’s not uncommon for these issues to cost thousands of dollars a year. They’re also damaging to seller relationships.
Payments are a siloed process in most companies, and the switch from cheques to ACH payments hasn’t changed that,” says Conroy.
COVID-19 is putting increased pressure on payment flows
If these manual workflows weren’t under pressure already, they’re being tested to the extreme because of COVID-19 pandemic and social distancing measures.
“Cheques are unworkable,” says Conroy. “While manual workflows to make ACH payments are failing. I’ve heard of payment clerks not being able to access the ERP from home, for instance. While another left their security token needed to access the banking portal in the office.”
The impact of failing to pay sellers isn’t trivial. “From an operational point of view, it means accounts payable teams are dealing with more enquiries than ever from sellers desperate to get paid,” he says. “There’s also a real business impact. Because if sellers —especially the smaller names in the supply chain—aren’t paid, they will collapse, potentially causing significant damage to the supply chain.”
Rethinking supply chain payments
To solve these issues, Conroy suggests that businesses revisit their payment processes. “A decade ago there were few other payment mechanisms open to businesses,” he says. “But the industry is getting shaken up by FinTech and this is providing businesses plenty of different payment options, allowing them to find the solution most optimum to their needs.”
TransferMate, for example, has built an innovative payments solution that removes a lot of the pain associated with traditional cross-border ACH payments.
“We’ve established a global network of bank accounts,” says Conroy. “This means we can accept a payment into one account in one country and pay from an account in another, circumventing the correspondent banking network and its associated fees. This account structure also allows companies using our service to make payments to close many of those expensive accounts they’re operating just to make payments.”
Another benefit is that TransferMate has built the solution to integrate into the P2P processes. “We operate a comprehensive API stack that allows us to connect with companies like Tradeshift and embed our services into the platform. There is no need for a payment clerk to log into an ERP or banking platform, they can make the payment from a platform like Tradeshift.”
This doesn’t just reduce the time and effort required to pay sellers, it also reduces the risk of error. “As the payment data is linked to the invoice, it also makes reconciliation easier for sellers, helping to remove friction from that relationship.” adds Conroy.
“In pure economic terms, making this change can save a business millions of dollars a year in cost and efficiency savings,” he adds.
New solutions for a new normal
These are challenging times for all businesses adjusting to the ‘new normal’ brought upon by the COVID-19 pandemic. Yet, for Conroy, there are positives to take out of this situation.
“We’ll see plenty of businesses focus on re-engineering their process—because they have too,” he says. “We’ll also see more businesses embracing new ideas and ways of working. And payments must be one of these areas.”
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